Impressions and thoughts from G-Star 2012

Just like Gamescom in Germany or Tokyo Game Show in Japan, G-Star is Koreas most important gaming industry event held in beautiful Busan and its newly built Bexco B2B hall.
Mobile Gaming is definitely on fire with the Korean smartphone gaming market ending up at 700 million US$, growing to 1.1 billion US$ next year as shown below.

Games like Dragon Flight distributed via instant messenger app Kakaotalk are making 2 million US$ each day, only through in-app-purchase transactions. Though the game play is nothing new, the game balancing is quite sophisticated and the smart integration with the Kakao Game Center API brought unspoken viral distribution among the 40 Million user base. Kakaotalk is at the same time the hottest Korean venture around with former NHN founders in the management board. 

Russian online gaming company Wargaming is growing dynamically too. Below is a picture of their party at the prestigious Busan Elune Night Club. I forgot the name of the girl group to be honest but it was quite a nice act.

What worries me though is the level of marketing spent per user = customer acquisition costs. Some companies with big marketing budgets are spending globally on a 2 US$ CPI level. Assuming a high conversion rate of 5% from free to paid users and aiming at a modest 30% target margin which would have to finance all other costs after "value creation", each paid users` life time value would have to be at a ~ 55$ which is more than unachievable.

Why are the new gorillas like Zynga, Gree and DeNA investing at that rate:

1. They need to show a growing number of users to Wallstreet. Usually, financial analysts do not have the insight into smart mobile marketing user acquisition strategies.
2. Its a bet or kind of call option that hopes that other games can be sold to their internal addressable market. Therefore the calculation above might work out if you factor in some "value at gain" in the future. 
3. Simply outspending competition and pushing them out of the market 

And they are not only buying users through marketing but through acquisitions too. For instance the Pokelabo acquisition by Gree was at at P/E Ratio of 25. Zynga bought an OMGPOP user at 6$. As we know the latter was an acquisition that definitely destroyed shareholder value.

On interesting company I heard of is AppDisco which pay you the more you achieve within a game - yes you heard right, pay you in cash. This reminds me of a similar company back in the old dotcom days which would pay you for clicking on banners. Indeed, this was way prior to Google clickfraud era.

Personally, I cannot find anything sustainable in this model and in spite of their massive growth, the oracle delphi tells me that they will not prevail.

Companies like Com2us or Gamevil, each posting about 20 million US$ per quarter seem to enjoy some sort of winner-take-it-all wave in the Korean market. In order to build the next Nintendo, they will have to

1. internationalize globally and not only in USA, China, Japan.
2. prepare for the next convergence trend where consumers will demand for a cross-platform experience. Not for every game, but it can become a significant future driver.

With regard to marketing innovation in the mobile space there will be a trend next year going into the direction of customer-life-time-value where game publishers do not outspend competition in costly price wars but rather foster their own eco-systems of channel partners.

The holy grail will remain viral of course, but as there are over 600 games in the Kakaopipeline currently, and viral features will be increasingly switched off by users, the level of exploding games like Anipang and Dragonflight will be distributed amony many more games.